The big news at the end of last week was ArcelorMittal raising sheet prices $40/st, which was immediately followed by increases at all the other mills. This move by the mills was largely anticipated by the market, and has raised the lowest HRC mill offers from mid to low $400/st into a tighter range just below $500/st. Now the question is “Will the increase be successful, and if so, how far can prices rally?” To answer this, we will look at the market conditions during the two previous mill increase announcements this year and how prices reacted to each. Below is a graph of the Platts TSI Daily Midwest HRC Index, with the red arrows signaling the two periods where mills attempted to raise prices.

In the first quarter, mills announced price increases, which temporarily stabilized the spot price. At this point, scrap prices stabilized, and both BOFs and EAFs were producing and selling profitably, allowing them to maintain production levels. Import levels declined, but did not disappear.

Prices resumed their decline in the 2^nd quarter until mills raised prices again in July. Before the price increase announcements, profitability on the marginal ton produced was negative for BOFs, and at the lowest level for both integrated and mini mills since 2016. This caused US Steel to remove capacity, which supported the increases. Differentials between domestic and global prices reached the lowest level in 5 years in July, signaling that imports were extremely unattractive. Scrap prices also moved up $30-$40 during July and August.

The summer announcements were successful in actually raising the price $100/st, but both increases only temporarily paused the downtrend. Destocking and tighter inventory management throughout the year has reinforced the steel buyer’s position to delay purchases, pushing spot prices to the lowest levels since 2016. Based on the factors above, for the current increase announcements to hold and encourage further increases, scrap prices will need to move higher in both November and December. Additionally, production will need to decrease to levels that match current demand, as a falling price represents an oversupplied market. Mills do have planned outages throughout the fourth quarter, but any holes in their November or December order book would signal too much supply. Imports will need to continue to decline.

We often discuss the futures curve as it represents the markets expectations for future spot prices, despite the fact that it has a horrible track record of predicting prices. In February, the curve was priced above $700/st for 2019, and around $720 for the second quarter. We now know that spot prices fell to $500/st in June. The futures curve had last week’s price increase priced in, as well as multiple more increases through the end of the year. With the current market factors discussed above, this seems ambitious. Therefore, we continue to recommend buying spot tons now at the lowest prices since 2016.